Dodd-Frank Swap Data Fails to Catch JPMorgan Whale, O’Malia Says

By Silla Brush -
Mar 19, 2013

Dodd-Frank Act derivatives rules
are failing to give regulators a full picture of the swaps
market and wouldn’t help them detect a loss similar to JPMorgan
Chase & Co. (JPM)’s London Whale trades, according to Commodity
Futures Trading Commission member Scott O’Malia.

Swap-trade data the agency has been receiving since the end
of last year from repositories including the Depository Trust
and Clearing Corp. is inadequate to identify large positions and
have overwhelmed government computer systems, O’Malia said in a
speech prepared for a Securities Industry and Financial Markets
Association conference in Phoenix.

The data “is not usable in its current form,” said
O’Malia, 45, one of the agency’s five commissioners. “The
problem is so bad that staff have indicated that they currently
cannot find the London Whale in the current data files.”

JPMorgan, regarded on Wall Street as one of the best-
managed banks in the world, lost more than $6.2 billion last
year in a derivatives bet on companies’ creditworthiness that
reached a net notional value of $157 billion.

Dodd-Frank was enacted in part to give regulators better
oversight of the $639 trillion global swaps market after largely
unregulated trades help fuel the 2008 credit crisis. The CFTC
and Securities and Exchange Commission were granted authority to
write rules requiring trade information to be reported to so-
called swap data repositories that function as central
recordkeepers.

Swaps Databases

Hundreds of pages of rules governing the databases were
among the first regulations completed by the five-member
commission and began to take effect at the end of 2012. Swap
dealers including JPMorgan and Goldman Sachs Group Inc. (GS) had to
begin reporting price and other data on interest rate and credit
swaps by the end of last year; the London Whale trades came to
light after steep losses in the first quarter of 2012.

Different swap dealers and trading counter-parties are
using their own reporting formats because the government failed
to specify standards, O’Malia said.

“It means that for each category of swap identified by the
70-plus reporting swap dealers, those swaps will be reported in
70-plus different data formats because each swap dealer has its
own proprietary data format it uses in its internal systems,”
he said. “The permutations of data language are staggering.
Doesn’t that sound like a reporting nightmare?”

The CFTC’s computer systems are failing to handle the
incoming data. “None of our computer programs load this data
without crashing,” O’Malia said.